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Thursday, August 7, 2008

Carl Ichan Stocks Having A Bad Month

After the Yahoo! debacle that had us watching his every move this summer, August has not gotten off to the best start for the billionaire, either.Blockbuster, Inc. (BBI) posted a larger than expected 2nd quarter loss lead by low DVD rental margins. The stock reacted by dropping $0.31 to $2.88 (-9.72%) in Thursday’s trading session. The $44.7 million dollar loss fell below estimates by a penny.

“Although it hasn't been driven into bankruptcy like some of its smaller rivals, Blockbuster has suffered nearly $4.5 billion in losses since 2001, causing its stock price to plummet by nearly 90 percent” (Liedtke, AP, 8/7/08).

My response to that is: …“Hasn't been driven into bankruptcy YET.” The industry is clearly moving towards different means of video rentals- from ordering movies directly from your cable service or using Netflix to have movies delivered to your home. Blockbuster’s in-store sales and rentals may become obsolete in only a few short years if they do not continue to diversify at a low cost. Their best chance of survival is to team up with a competitor like Netflix and get in front of the 8-ball rather than stay behind it (i.e. pull a Sirius-XM Satellite Radio merger).

Sure, Blockbuster is doing what they can – stocking more of the DVD hits, focusing on the hot XBOX360® and Nintendo Wii® games and closing 233 of its nearly 8,000 stores this year. But they still lag far behind rival, and also unimpressive, Netflix with their online rentals.

CEO James Keyes helped prop Netflix’s up 1.5%, saying spending on advertising its online rental service has probably peaked. If he really believes the stores are more important than its online rental service, I doubt he would close as many stores as he has. Downloading multimedia is the present, not the future. Sure, Blockbuster has more of a two-facet system going, but their advertising concentration should be more proportional to both current and projected costs, sales and growth.

By the way, Blockbuster is sure lucky they were able to get out of the Circuit City acquisition. They should be looking to become a takeover candidate, not vice versa. Two bad companies do not make a good one.

For Icahn, the August pain has not been limited to Blockbuster. Shares of Biogen (BIIB) fell $19.64 (-28.2%) to $50.12 during the August 1st trading session after they released material news: The Bioigen-Elan partnership prize Multiple Sclorsis drug Tysabri yielded new cases of brain disease in patients. The drug had previously been halted in 2005 because of the same problems.

Again, my response: There really is no reason to buy a biotech stock with a short pipeline. Celgene or Gilead Sciences would be much better options. Biogen still has not recovered any of the massive drop last week- trading flat to close at $49.88 on Thursday.

Check out these three Icahn favorites and their three month performance; Even he does not always beat a volatile market: